Insight: Be fearful when all others are greedy, and vice versa

Lin Che Wei , Jakarta | Mon, 10/20/2008 11:17 AM | Headlines

Vice President Jusuf Kalla indicated that the impact of the financial crisis in Indonesia would be limited because only a small proportion of the community held stock.

The VP's comments were supported by Lall, Cardarelli and Elekdag in the latest IMF World Economic outlook, which argues that the economic impact of financial crisis may be bigger in countries with more sophisticated financial markets.

It is true that the impact of the financial crisis for a country like Indonesia might not be as big as the impact on a developed market such as the United States. Nevertheless, given the magnitude of this financial tsunami, the minor impact might have serious implications.

We had better not underestimate the implications of the financial crisis, as it could have quite an impact on countries such as Indonesia where traditional bank lending dominates.

The greatest risk facing Indonesia at the moment is if fear starts to invade the banking sector and the banking sector starts to freeze its lending, especially their working capital loans to the real sector. If this happens, the transmission of the crisis to the real sector will be fast -- even instantaneous.

Currently, our greatest enemies are fear and lack of time. Fear results in panic selling and irrational behavior. Lack of time results in impetuous decisions. Many investors adopt a philosophy of "Sell First, Ask and Think Later".

This is because they believe there is no safe place to put their money. During this time the recipe for recovery is: Time plus Greed. With enough time, and after careful consideration, people will come to realize that Indonesia, with its abundant resources and better fiscal and monetary policies, supported by improvements in corporate governance, remains a very dynamic possibility for fundamental improvements. The suspension of trading on the market, which allowed more information to flow to investors, acted as a circuit breaker giving people enough time to act more rationally.

Ironically, Greed is the second factor that will fight the fear -- people's desire to look for a profit is one reason they will face the fear, take a risk and start scooping up cheap and battered assets.

Greed is an antidote to fear. The opportunity to make money is one that will push up stock prices, which in turn will make the fundamentals look better. I for one believe prosecuting profit-seeking individuals or entities during this time of fear is not the right approach.

Investors need to consider three factors when looking to invest in Indonesia.

First, as Indonesia is an emerging market, it will have faster growth than developed markets. As a result, we must ensure that we are not paralyzed by fear and slip into a shell-shocked belt-tightening mode. The problem is in developed markets, not in emerging ones. It is ridiculous that several political economists have tried to shift the blame for the global liquidity crisis onto domestic factors.

Second, asset prices on developed markets generally will become more attractive. This will make them a serious competitor for emerging markets, which are traditionally considered as holding riskier assets. Therefore, it is important for Indonesia to continue to reduce the perception of risk and increase its attractiveness.

This is important to make investors become more comfortable investing in Indonesia. Instead of behaving in ways that will increase the risk factor, Indonesia should continue the reform to increase the country's attractiveness. The expansion of the list of companies that are considered strategic could be a dangerous trend. Everyone is watching very closely what happen to Qatar's investment in Indosat.

Indonesia's strong dependence on crude oil prices, natural resources and mining also plays an important role in the list of the nation's financial risks. With more countries adopting more protectionist behavior, an investor-friendly attitude is likely to make Indonesia a darling for the investors.

Third, controlling the flight of capital and the fear of the business community. The persecution of businesspeople who try to make a profit and anti-business behavior by certain government officers in the guise of an anti-corruption drive might have an unfavorable impact.

Corruption eradication, good corporate governance and accountability are very important and must continue. However, there are always people who take a witch-hunting attitude, trying to find a culprit and scapegoat for any problem that we face.

The current crisis was caused by a liquidity crunch, a concentration of margin trading and repo on certain counters and the stock market crash.

Timing also plays a very important role, so cleaning out the system and prosecuting businesspeople who act suspiciously at the time of the crisis might mean the money starts looking elsewhere.

This will increase the risk factor and deter "Greed". Any statement saying that anyone who seeks to benefit from the capital market might face prosecution is a ridiculous statement indeed.

The fundamentals of the Indonesian economy will remain strong. Indonesia should be confident that with sufficient disclosure and a proactive approach to handling the crisis, allowing the market to find equilibrium will be the solution to the financial problem. Consider Warren Buffet's advice on how to become rich: Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.

The writer is the founder of Independent Research & Advisory Indonesia. He can be reach at Lin_chewei@pacific.net.sg

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